The annual missives that billionaire investor Warren Buffett writes to shareholders of his Berkshire Hathaway Inc.
are always carefully scrutinized by big-name investors and small-time
stock-pickers alike. But this year’s letter promises to get even more
attention.
That’s because this year’s letter has been five decades in the making.

It was in 1965 that Mr. Buffett and his vice chairman, Charlie Munger,
took over a troubled textile company called Berkshire Hathaway and
began transforming it into the massive conglomerate it is today. Along
the way, the “Oracle of Omaha” has amassed a fortune, built a following,
and become a celebrated figure
in many corners of the world. Mr. Buffett has promised that this year’s
letter would look back on the past five decades, and speculate on the
next five.

The MoneyBeat team is providing analysis on the letter in real time as we read it Saturday morning. Join us as we dive in.

6:07 am

Welcome

by Erik Holm

Welcome
aboard. The Berkshire letter due out in about an hour has been 50 years
in the making, but it’s also been many months in the writing.
In the very last paragraph of last year’s letter, Warren Buffett
piqued the interest of his most ardent followers—the ones who read all
the way to the end of his annual missives—with this line:

Next year’s letter will review our 50 years at Berkshire and speculate a bit about the next 50.

It wasn’t a promise Mr. Buffett took lightly. In December, Mr. Buffett told the Journal that he’s already written 20,000 words of the upcoming letter. In normal years, the letter runs about 15,000. We’re going to have a lot of reading to do today.

6:11 am

Hearing from Munger

by Anupreeta Das

Berkshire
shareholders and those who follow the conglomerate’s activities will
get a bonus this time around: Berkshire Vice Chairman Charlie Munger is
also writing down his vision for Berkshire for the next 50 years.
Shareholders love Mr. Munger’s sometimes bruising wit and deadpan
delivery, but his voice has been absent from last letters.
Mr. Buffett said in December that he and Mr. Munger had agreed not to
read each other’s accounts until shortly before today’s publication.
The letter will contain a note from Mr. Buffett stating that neither he
nor Mr. Munger changed a word of commentary after reading the other’s
piece.

6:16 am

What to Expect

by Erik Holm

So
now that the letter is finally arriving this weekend, what can
Berkshire shareholders and Buffett acolytes expect? We covered that in
detail in this post on Friday, but we’ll hit some of the key point as we wait for the letter to land.
(And don’t think we didn’t try to find the letter on Berkshire’s website already . It’s not there yet, but it should be at this link when it goes live.)

6:19 am

Together or Apart?

by Erik Holm

As
he looks 50 years into the future, we expect Mr. Buffett will address
the question of whether Berkshire should stay together–and perhaps, how
it could be organized under his successor.
At a time when more and more companies are spinning off operations to
narrow their focus and make their operations easier to value, Mr.
Buffett will likely say Berkshire works better as a conglomerate.
Berkshire’s insurance units, including car insurer Geico Corp., fueled
Berkshire’s growth over the past five decades by giving Mr. Buffett
funds to invest elsewhere. Barclays analyst Jay Gelb said in a research
note this week that Mr. Buffett is likely to argue that “excess cash
from Insurance and other operations can be effectively and
tax-efficiently deployed” to grow other parts of the company.
That’s not unalloyed good news for all Berkshire shareholders. Some
of them think the company is so massive that some crown jewels of the
company aren’t being fully appreciated by the market. Mr. Gelb says that
“means substantial value could remain unlocked for several major
units.”

6:25 am

About that Dividend

by Erik Holm

How will Berkshire use its capital in the future? Mr. Buffett has
made it clear that Berkshire is very unlikely to pay a dividend in his
lifetime. He argues that he can use the money that would be spent on a
dividend to grow Berkshire instead–and he has the track record to prove
it.
A small but vocal group of shareholders has long tried to push Mr. Buffett to pay one, but a vote on the topic at last year’s annual meeting was roundly defeated. In fact, it attracted so little support that it likely set back the cause.
Yet at that same meeting, when asked what Berkshire will look like in 20 years, Mr. Buffett acknowledged that there would come a time when the company has more capital than it knows what to do with.
“What I do know is that we will have more cash than we can
intelligently invest in the future,” he said. “It’s not on a distant
horizon. The number is getting up to where we can’t intelligently deploy
the amounts coming in.”
Does that mean Mr. Buffett could revisit the dividend question this
weekend as he peers into his crystal ball? Perhaps. But he may instead
focus on the topic of share repurchases. Berkshire has already
instituted a program of buying back stock when shares fall below a
specific target (which is adjusted each quarter). There’s a chance he
could discuss Berkshire’s target and argue for making it less
restrictive.

6:34 am

The Next Buffett

by Erik Holm

Mr. Buffett likes to joke that he’ll continue to run Berkshire via seance
after he’s gone. Joking aside, though, the question of who will take
over the role of chief executive is the biggest topic hanging over the
company and its shareholders. Mr. Buffett has said it’s the most
important thing that Berkshire’s board discusses when it meets.
That said, the chances that Mr. Buffett will name his successor in
the CEO role today are essentially zero. I’m confident making that
prediction even though I could be proven horrible wrong in under half an
hour. It’s just not going to happen....

A vervet monkey will scream an alarm when a predator is nearby, putting itself in danger.

A recent solution to the prisoner’s dilemma, a classic game theory scenario, has created new puzzles in evolutionary biology.

When the manuscript crossed his desk, Joshua Plotkin, a theoretical biologist at the University of Pennsylvania, was immediately intrigued. The physicist Freeman Dyson and the computer scientist William Press, both highly accomplished in their fields, had found a new solution to a famous, decades-old game theory
scenario called the prisoner’s dilemma, in which players must decide
whether to cheat or cooperate with a partner. The prisoner’s dilemma has
long been used to help explain how cooperation
might endure in nature. After all, natural selection is ruled by the
survival of the fittest, so one might expect that selfish strategies
benefiting the individual would be most likely to persist. But careful
study of the prisoner’s dilemma revealed that organisms could act
entirely in their own self-interest and still create a cooperative
community.
Press and Dyson’s new solution
to the problem, however, threw that rosy perspective into question. It
suggested the best strategies were selfish ones that led to extortion,
not cooperation.

Plotkin found the duo’s math remarkable in its elegance. But the
outcome troubled him. Nature includes numerous examples of cooperative
behavior. For example, vampire bats donate some of their blood meal to
community members that fail to find prey. Some species of birds and
social insects routinely help raise another’s brood. Even bacteria can cooperate, sticking to each other so that some may survive poison. If extortion reigns, what drives these and other acts of selflessness?

Press and Dyson’s paper looked at a classic game theory scenario — a
pair of players engaged in repeated confrontation. Plotkin wanted to
know if generosity could be revived if the same math was applied to a
situation that more closely resembled nature. So he recast their
approach in a population, allowing individuals to play a series of games
with every other member of their group. The outcome of his experiments,
the most recent of which was published in December in the Proceedings of the National Academy of Sciences,
suggests that generosity and selfishness walk a precarious line. In
some cases, cooperation triumphs. But shift just one variable, and
extortion takes over once again. “We now have a very general explanation
for when cooperation is expected, or not expected, to evolve in
populations,” said Plotkin, who conducted the research along with his
colleague Alexander Stewart.

The work is entirely theoretical at this point. But the findings
could potentially have broad-reaching implications, explaining phenomena
ranging from cooperation among complex organisms to the evolution of
multicellularity — a form of cooperation among individual cells.

Plotkin and others say that Press and Dyson’s work could provide a
new framework for studying the evolution of cooperation using game
theory, allowing researchers to tease out the parameters that permit
cooperation to exist. “It has basically revived this field,” said Martin Nowak, a biologist and mathematician at Harvard University....MORE

What
happens when asset managers believe that equities are still the best
and perhaps only play in town, but that shares, particularly in the
U.S., are close to being fully valued, and long-term bonds are risky?
Answer: Cash positions spike, as wealth managers park money in cash or
cash equivalents and wait for dips in the market before buying more
stocks.

There’s an important nuance here. The
larger-than-normal liquid positions that we are spotting don’t mimic the
defensive crouch seen in a recession. Rather, they are often cautious
and temporary sideline holdings, awaiting the right buying
opportunities.

That, in essence, is
where our 40 asset managers stood at the end of 2014, a story that can
be found buried deep inside our asset-allocation table of America’s
largest asset managers, on pages 28 and 29.

At
first blush, allocations by the group of 40 haven’t changed much
because of contradictory and uncertain views. Overall stock allocations
average 51%, the same as a year ago, but U.S. stock holdings are up
slightly, to 33% compared with 31% last year. Counterintuitively, with
U.S. interest rates soon to rise, allocations in fixed income are also
slightly higher this year -- at 27% versus 26% last year.

But
that’s our story: A good portion of those fixed-income holdings are due
to asset managers quietly parking cash in “cash equivalent” short-term
fixed-income instruments. Among them are a smattering of corporate
bonds, commercial paper, and mortgage-backed securities, and a bigger
proportion of asset-backed securities, such as those backed by consumer
loans, mortgage-servicing fees, and communication-tower lease revenues.

JPMorgan
Chase, Highmount Capital, Wilmington Trust, and Barclays are some of
the wealth managers that have increased cash or cash-equivalent
investments in this way. Consider Brown Brothers Harriman, which had 27%
in cash and equivalents on hand at year-end 2014, by far the largest
stash -- some to offset risk, but most on hand to deploy on market dips,
says the firm’s chief investment strategist, Scott Clemons.

Here
is why Clemons’ cash position isn’t easy to spot in our table: Brown
Brothers has just 3% in pure cash, but it has quietly shifted 24% of its
portfolio into ultrashort-term instruments that are lumped into the
firms’ fixed-income bucket.

It’s an
opportunistic holding. When the oil-price collapse triggered a fall in
shares in early December, Brown Brothers added modestly to
stockholdings. With cash levels still over 20%, Clemons said he is
poised to pounce further into emerging markets, encouraged by temporary
oil-price-induced weaknesses. Brown Brothers Harriman is not alone.
Among other firms with cash embedded in their fixed-income allocations
are Genspring, with 8% of its total portfolio; Atlantic Trust, with 9%;
and Barclays, with 7%. It raises the question: Why?

BLAME IT ON UNCERTAINTY.
Wealth managers are all privy to the same data, but they’re coming up
with very different conclusions about the meaning for investors. It’s a
sign of abnormal times.

“Earlier in the
recovery cycle, people were more certain in their allocations and there
was more uniformity in outlooks, but now everyone realizes growth isn’t
bouncing back as it has historically,” says Bruce McCain, chief
investment strategist at Key Private Bank. “Since you can’t frame what’s
going on based on historical trends, you get a wider range of ideas
about how to exploit what’s happening.”

Barron’s
annual asset-allocation survey typically finds strong majority
opinions, such as last year’s 75% that backed an increase in foreign
developed stocks. But in this year’s survey, for which data were
gathered in December, only U.S. stocks got a thumbs up, with 56% of
wealth managers recommending adding a touch more. In other asset
classes, a roughly equal number of wealth managers were positive or
negative....MORE

Webster's New World College Dictionary defines "arbitrage" as "a
simultaneous purchase and sale in two separate financial markets in
order to profit from a price difference existing between them," but who
reads dictionaries, come on. The
practical definition of "arbitrage," at least in the marketing of
financial products, is "a thing we think we can make money doing, keep
your fingers crossed." So when someone comes to you and offers you a
thing called a "Fixed Price Arbitrage Life Insurance Contract,"
he's not actually offering you the ability to buy and sell the same thing at different prices, locking in a risk-free profit. It's not actually an arbitrage.

EXCEPT NO HOLY GOD IT IS THIS IS AMAZING:

Life insurance is a popular savings product in France, and typically
the customer allocates their money among different investment funds
offered by the insurer. But this contract was not typical: prices for
the funds were published each Friday, and clients were allowed to switch
funds at those prices anytime before the next price was published, even
if markets moved in the meantime.
L’Abeille Vie called this an arbitrage, but really it was a gift. Is
the stock market up this week? Just call your broker to buy it at last
week’s price and pocket the difference.

That's from Dan McCrum at FT Alphaville,
and while I suspect that most of my readers who enjoy a good
derivatives-mispricing yarn also read Alphaville, I figured I'd point it
out here because it is the best of all derivatives-mispricing yarns,
and I would hate for anyone to miss it. So go read him, and/or the French magazine -- aptly named "Challenges" -- that first reported this....MUCH MORE, including four footnotes:

Webster's
is a little weird on this point. I quoted definition 1 in the text, but
definition 2 is "a buying of a large number of shares in a corporation
in anticipation of, and with the expectation of making a profit from, a
merger or takeover." That normally goes by the name "merger arbitrage,"
or the delightfully paradoxical "risk arbitrage"; in my idiolect you
can't just call it "arbitrage." But you see why Webster's would put it
there, because otherwise "merger arbitrage" becomes incomprehensible.

I was taking the article half seriously when I read the “end of
arbitrage”. All I can say is this marks it as quackery. Oh sure,
arbitrage may end up being primarily the domain of computers working at
lightning speeds. But, the end? Hogwash, there will never be perfect
markets.

People, people, people arbitrage opportunities have been disappearing for the past 150 years!

I guessing the two commenters didn't have the definition: "The simultaneous purchase and sale of the same instrument in different markets at different prices" pounded into their head so often their ears bled.
I did.
How many arbitrages do they think present themselves each year?

Spotting and acting on an arb is pure alpha and here is a dirty little secret:
The entire amount of alpha available to the entire hedge fund industry is only $30 billion per year.
As reported by a hedge fund maven via Investment News back in 2006:

...PHILADELPHIA - Everyone in the crowd assembled for the CFA
Institute's hedge fund conference took notice when David S. Hsieh said
that the amount of alpha available in the hedge fund industry each year
is $30 billion.

Mr. Hsieh, a professor of finance at the Fuqua
School of Business at Duke University in Durham, N.C., presented a
synopsis of his ongoing research, which focuses on the style, risk and
performance evaluation of hedge funds, at the Feb. 16 conference here.
As part of his work, Mr. Hsieh questioned whether flows into hedge funds
are causing a decline in hedge fund returns and what might happen if
the high rate of inflow continues.

Because of difficulties in
obtaining reliable hedge fund data, Mr. Hsieh used fund-of-hedge-funds
data and broke down returns into alpha and beta sources. He said the
research led him to "feel comfortable" determining that there is a
finite amount of alpha - conservatively, $30 billion - managed by the
approximately $1 trillion hedge fund industry. And even if capital
invested in hedge funds were to rise, the amount of alpha would remain
the same....

Got that? All alpha not just arbitrage but all alpha was just $30 bil. in '06.
Here's CBS MoneyWatch in March 2013:

In so called risk (merger) arbitrage the emphasis is on the first word.
Cash-and-carry, buying physical and shorting a derivative is not arbitrage.
When people use the term "arbed away" when talking about market anomalies the are not talking about an arbitrage.
Shorting an ETF and buying the component equities is not an arb, it's just a hedged trade.
Same for Index Arbitrage.

The total pool of arb opportunities may be as small as $1 billion.
Even the old Royal Dutch and Shell Transport trade was not an arb, just a fairly good pair trade.....MORE

The faux-eastern-European sounding sub-head is to honor one of her
commenters at Dizzynomics who thought that, because of her last name
(technically feminine adjectival surname, I looked it up), she was an English-as-a-second-language émigré from points east.*
That's pretty funny.

The hate terminology comes from the fact that I was dithering whether to link to the piece that is the basis for her post "The time value of gold and anything" while she was using it as a take-off for some fancy commodities-and-more writing. From Dizzynomics.....

Some offbeat opportunities occasionally arise in the arbitrage field. I participated in one of these when I was24 and working in New York for Graham-Newman Corp.Rockwood & Co., a Brooklyn based chocolate productscompany of limited profitability, had adopted LIFOinventory valuation in 1941 when cocoa was selling for50 cents per pound.In 1954 a temporary shortage of cocoa caused the price to soar to over 60 cents. Consequently Rockwood wished to unload its valuable inventory - quickly, before the price dropped. But if the cocoa had simply been sold off, the company would have owed close to a 50% tax on the proceeds.

The 1954 Tax Code came to the rescue. It contained an arcane provision that eliminated the tax otherwise due on LIFO profits if inventory was distributed to shareholders as part of a plan reducing the scope of a corporation’s business. Rockwood decided to terminate one of its businesses, the saleof cocoa butter, and said 13 million pounds of its cocoa beaninventory was attributable to that activity. Accordingly, thecompany offered to repurchase its stock in exchange for thecocoa beans it no longer needed, paying 80 pounds of beansfor each share.

For several weeks I busily bought shares, sold beans, and made periodic stops at Schroeder Trust to exchange stock certificates for warehouse receipts. The profits were goodand my only expense was subway tokens....

And many more.
And apparently, for some reason the FT Alphaville journalist Izabella Kaminska makes me think of arbitrage.
All together now: "The
only perfect hedge is at Sissinghurst":

As yields on German bonds plunged further yesterday, with some
maturities closing at record negative levels, the worldwide trend toward
ultra-low interest rates
remains largely intact. Yet the causes and implications of this
movement are quite complex. Here are 10 things to know, from the well
understood to the speculative.
Less Than Zero

Although German bond markets are leading this historical phenomenon
-- more than 30 of the 54 securities in the Bloomberg Germany Sovereign
Bond Index are at negative yields -- other European government markets
also are increasingly seeing ultra-low yields dip into negative
territory. JPMorgan has estimated that as much as 1.5 trillion euros
($1.7 trillion) of euro-zone debt trades with negative yields in a
growing number of countries, including Austria, Denmark, Finland,
Germany, the Netherlands and Switzerland. Moreover, this isn't limited
to the secondary market; some countries have issued debt at negative
yields.

“High quality” European fixed income markets aren't unique in
experiencing an extraordinary period of ultra-low yields. Peripheral
government bonds, such as those issued by Italy and Spain, have been
trading at record low yields, as have corporate securities issued by companies such as Nestle and Shell.

The seemingly illogical willingness of investors to pay issuers to
borrow their money is neither irrational nor driven by just
noncommercial considerations (such as regulatory requirements or forced
risk aversion). As the European Central Bank prepares to start its own
large-scale purchasing program next week, some investors believe they
could make capital gains on such negative yielding investments.

There are many immediate reasons to justify this investor optimism. The impact of the ECB’s
quantitative easing program (whose scheduled purchase of government
bonds is likely to run into a relative scarcity of supply) is amplified
by still-sluggish growth, “low-flation” and the threat of deflation.
Geopolitical developments also play a role, along with messy national
and regional politics in Europe....

U.S. shale oil is deepening the discount of U.S. crude
prices to global benchmarks, with the price gap turning into the de
facto indicator of the health of American shale supply, a shale spread
of sorts.

The gap between West
Texas Intermediate (WTI) and Brent expanded to its biggest in a year at
almost $12 a barrel as U.S. oil stocks hit records while global demand
supported Brent. The surging U.S. production and inventories point to an
"oversupplied market which is hard to ignore," ANZ Bank said in a
report on Friday.

Prior to
the rise of U.S. shale oil production more than half a decade ago, the
spread between WTI and Brent had moved very little for 20 years, largely
hovering around zero.

The
emerging U.S. glut has since weighed on WTI, which is increasingly a
more domestic price gauge than a global one, while non-U.S. benchmarks
rise up and down according to demand from Asia and geopolitics in the
Middle East.

One factor
that could narrow the spread would be a dramatic cutback in shale
production as weaker crude prices challenge the economics of shale oil.
The spread could shrink further if, or when, the United States adds to
world supply with crude exports, which are banned for reasons of
protecting national resources for domestic consumption.

Opec's blueprint?
The spread between Brent crude and WTI
has widened to a 12-month plus high of $10.78/barrel and someone very
high up in Opec is probably enjoying the wryest of smiles as we speak.

Far be it for from the floor to suggest a masterplan has been at work
here, but with the global oil cartel's pricing linked to the Brent
benchmark, the hold market share at-all-costs strategy embarked upon at
its November meeting is starting to pay dividends.

"This is a really
nice situation for Opec and its members with their profitability going
up while WTI stands still and that means there is very little support
for the shale sector in the US," says Saxo Bank's head of commodities,
Ole Hansen.

Demand is on the rise for Brent, according to a senior Opec official
yesterday from Saudi Arabia, helping to propel it to $61.45/barrel at
0755 GMT today, a stark contrast to WTI's laboured $50.73/b.

Yet another huge increase in US oil inventories in yesterday's EIA
report is stymieing any hopes WTI has of joining Brent on its upward
trajectory with inventories at main US storage hub Cushing rising to
48.6 million barrels.

That has also seen the contango between the front-month WTI price and
the second-month widen to $2/b leaving the US benchmark seemingly
marooned in "rangebound territory for a while," says Hansen.

Hansen suggests that while there may be a selloff this morning, Brent
crude could yet go higher to test the $63/b and even the $65/b area
while WTI "is going nowhere fast".

One of the biggest trials in French history is wrapping up: At its
center is 92-year-old Liliane Bettencourt, France's richest woman and
the heiress to the L'Oréal fortune. (Her father, Eugène Schueller,
founded the beauty giant.)

The proceedings drew comparisons to the Brooke Astor trial (or Downton Abbey, in yesterday's New York Times), and they captivated the French public despite their confusing nature — hence the spate of explainers in the French press geared toward "les nuls," or dummies.

The case concerns Bettencourt's $41.2 billion fortune (as estimated by Forbes)
and her ability to manage her affairs. Bettencourt lives on an estate
in Neuilly-sur-Seine, outside Paris, and until recently owned a private
island in the Seychelles. Her poor health has prevented her from
attending the trial, where it is being determined whether she was taken
advantage of by various figures in her life — or whether she was in
control of her own faculties and gave them money and gifts willingly.

Bettencourt has given much of her fortune, including artworks by Matisse, Picasso, and Man Ray, to the photographer François-Marie
Banier — an estimated 1 billion euros over the course of their long
friendship. She even changed her will to make Banier her sole heir.
Banier's camp insists that Bettencourt was of sound mind when she gave
him money and gifts, while the opposition has suggested that her
dementia and the fact that she was on 56 different medications clouded
her intentions....MORE

Crude-oil futures rebounded Friday, with Brent crude set for its
biggest monthly gain in nearly six years, ahead of U.S. rig-count data
due later in the trading day, and Chinese official manufacturing numbers
expected over the weekend.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in April
CLJ5, +1.47%
rose $1.07, or 2.3%, to $49.24 a
barrel in the Globex electronic session. April Brent crude
LCOJ5, +1.98%
on London’s ICE Futures exchange rose $1.26, or 2.1%, to $61.31 a barrel.

The
premium of Brent crude to Nymex WTI crude remains wide at almost $12 a
barrel, its widest in more than a year. On a monthly basis, Brent is
headed for a gain of nearly 14% for the active April contract, the
biggest monthly gain for an active monthly contract since May 2009, when
Brent tacked on nearly 29%.

This week’s U.S. rig-count data will be released by oil-field-services firm Baker Hughes Inc. later Friday.
“It
is pretty obvious that a fall in rig count does not translate
immediately to a drop in oil output. But both the time lag as well as
the extent to which a declining rig figure translates into lower
production, are tricky to project,” JBC Energy said in a report....MORE

When he was seven years old, Max-Hervé George was given a magic
ticket by his father. It lets him turn back the clock, to invest with
perfect hindsight week after week, steadily accumulating a fortune.

The ticket is a life insurance contract and Mr George, now 25, has
fought for years in the French courts to preserve its magic. He could be
a billionaire by the end of this decade and, by the end of the next,
his contract would be worth more than the insurance company which stands
behind it, Aviva France.

There is no mystery to the financial magic, however. Instead it is a
story of grand stupidity, of how a French insurer wrote the worst
contract in the world and sold it to thousands of clients.
The company was L’Abeille Vie. In 1987 it began to offer a special
deal to its richer clients, a Fixed Price Arbitrage Life Insurance
Contract.

Life insurance is a popular savings product in France, and typically
the customer allocates their money among different investment funds
offered by the insurer. But this contract was not typical: prices for
the funds were published each Friday, and clients were allowed to switch
funds at those prices anytime before the next price was published, even
if markets moved in the meantime.

L’Abeille Vie called this an arbitrage, but really it was a gift. Is
the stock market up this week? Just call your broker to buy it at last
week’s price and pocket the difference.

In a world where the price of everything is now a mouse click away,
offering a hindsight investment service seems incredible, if not
suicidal. Yet thirty years ago prices for funds were published
infrequently. Trading involved calling your broker, visiting him person,
or maybe sending a fax. It could take days for the trade to be
processed, during which time the market could move again.....READ ON

Long suffering time readers know our pitch for this heating season: Average temperatures overwhelmed by natural gas supply.
We expect the trend to continue at minimum into the spring and will try to stave off the boredom that comes from guessing correctly by designing exotic shoulder season spreads to get widowmaker trapped in.
From the Energy Information Administration:

In the News:

As record setting cold blasts the East, western temperatures warmer than normal
When looking at the nation as a whole, since the start of the
year, natural gas consumption has remained relatively flat and
temperatures, on average, have been close to normal. Regionally,
however, there is a stark difference between the eastern and western
halves of the country.

Nationally, natural gas consumption from January 1 through February
20 was 2% higher this year compared to last year, with 6 of the top 20
U.S. natural gas consumption-days occurring during that period,
according to data from Bentek Energy. Driven by regional weather
patterns, consumption was up 4% in the eastern half of the country
(Northeast, Southeast, and Midwest) over last year, but was down 9% in
the West (Northwest, Rockies, and Southwest) during that period. In
particular, Texas and the Southeast saw increasing demand, mostly due to
power burn for space heating, of more than 10% during this period over
the year-ago period.

Since the start of the year, record cold temperatures and significant
snowfall have occurred in the eastern half of the country.
Long-standing temperature records tumbled east of the Rockies, and
cumulative heating degree days
from January 1 through February 20 equaled 2,220, 11% more than normal.
This is in contrast to the western half of the nation where daily
temperatures have often been above average. Seven states — California, Idaho, Nevada, Oregon, Utah, Washington, and Wyoming
— have reported average temperatures for the month of January in the
top 10 warmest on record, with cumulative HDD since the beginning of the
year totaling 922, 25% under normal.

With lower demand, spot volumes in the West have traded this year
near or below that of the Henry Hub price, the U.S. natural gas
benchmark, which averaged $2.88 per million British thermal units
(MMBtu) January 1 to February 20. Average spot pricing for PG&E
Citygate in California, Opal in Wyoming, and Northwest Sumas in
Washington were $3.10/MMBtu, $2.64/MMBtu, and $2.54/MMBtu, respectively,
for that period and much less than the key Northeast trading hubs,
which have been trading four or more times higher than the West....MUCH MORE

Despite intense snowstorms in Japan, severe hail and windstorms in
Europe, major flooding in parts of the UK and several aviation
tragedies, global insured losses for 2014 were the lowest for five
years, at roughly $33 billion, according to Guy Carpenter & Company,
LLC.
The international risk and reinsurance broking specialist’s annual
‘Global Catastrophe Review’ report has recently been published,
highlighting a significant drop in insured losses throughout 2014 from
natural and man-made disasters.

The Americas, which includes the U.S. and Canada, contributed around
57% of the global insured loss figure, while Europe, the Middle East and
Africa comprised roughly 21%, and Asia, Australasia regions fronted
approximately 23% of the losses, according to Guy Carpenter’s study.

“Although insured losses for 2014 were among the lowest recorded in
years, we still observed powerful impacts and significant losses from
both natural and man-made catastrophes,” advised James Waller, Research
Meteorologist at GC Analytics.

Regardless of varied totals from several of the world’s leading
brokers and reinsurers it’s clear to see that whether at the high or
low-end of estimates, 2014 was someway below previous years and
long-term averages.

The low-level of catastrophe losses has of course been exacerbating
the softening of catastrophe reinsurance pricing. With traditional
reinsurers and insurers finding the levels of loss manageable, excess
has built up which alongside growing alternative capital results in
ongoing pressure on rates.

Of course, this is not a bad thing for anyone, except perhaps for
traditional reinsurers who are more accustomed to higher margins on this
catastrophe exposed business. Lower reinsurance costs ultimately
benefit insurance consumers and force capital to be more efficient,
something that ILS excels at....MUCH MORE

The SPDR S&P Oil & Gas Explore & Prod. (ETF) closed yesterday at $51.54. The home of the larger oils, the Energy Select Sector SPDR (ETF), closed at $79.35.
We expect both to trade lower before all is said and done.
Meanwhile, more is said than done.

From Slope of Hope:

When Springheel referred to One More Heave in his post this morning, I had something like this in mind. Anyway……..My obsession with crude oil and energy
stocks is well-documented. I wanted to talk a bit about this daily chart
of the oil & gas explorers ETF. I see it going through these
phases:

+ Magenta – a very well-formed head and shoulders top; the bulls didn’t have any idea what was about to happen to them;
+ Yellow – the initial plunge, prompted by the magenta pattern, with some stabilization;
+ Cyan – after the Saudis said they weren’t going to
curtail production, all bets were off. After Thanksgiving, things went
into another free-fall, double-bottoming in late December and early
January;
+ Grey – this is what I’ve been stomaching all month – – a blinkered recovery

In spite of crude oil weakening quite clearly, the energy stocks seem
to be giving me the bird and not budging. I think they’re going to
budge sooner or later, and to the downside. At a minimum, I think
they’ll challenge the lows we saw last month. If deflation really grabs
hold, we could conceivably see oil in the 30s this year, with energy
stocks following it south.

Thursday, February 26, 2015

I think Izabella Kaminska was the first journo to seriously raise the possibility, last week, which post we linked to in Monday's "Oil: Cushing Storage Capacity Should Be Maxed Out By May".
After trading down to $47.80 the April futures have reversed a bit and are trading at $49.02.
Natural gas did not reverse and is changing hamds at $2.691.
We expect both to be lower a month from now.

From Hard Assets Investor:

Energy underperformed, while other commodities advanced.

Most cost commodities rallied today, shrugging off a big spike in the
U.S. dollar. However, energy prices were the exception as both oil and
natural gas were hammered. Meanwhile, stock markets retreated amid
profit-taking after running up to record highs earlier this week.

In
today's economic news, the Bureau of Labor Statistics reported that the
Consumer Price Index in the United States fell by 0.7 percent in
January, slightly more than the expected 0.6 percent decline. At the
same time, the core CPI, which excludes food and energy, increased by
0.2 percent in January, faster than the anticipated 0.1 percent
increase. On a year-over-year basis, the headline CPI was down by 0.1
percent, the first negative reading since 2009, while the core CPI was
up by 1.6 percent....

Crude oil fell as traders focused their attention on the record inventory levels in the U.S. That pushed WTI to an $11.79 discount to Brent,
the highest level in more than a year. The U.S. benchmark was last
trading lower by $2.29, or 4.49 percent, to $48.70, while the European
benchmark lost $1.14, or 1.85 percent, to $60.49.

"We're going to
see pretty fast inventory builds over the next few weeks," Francisco
Blanch, head of commodity research at Bank of America-Merrill Lynch,
told CNBC. "If you run out of [inventory] space, prices tend to react a
lot more violently to adjust that supply and demand imbalance and
that's what we expect over the next few weeks," he said, forecasting
both WTI and Brent will fall toward $30 a barrel.

"Within around
two months, [onshore storage will] be completely exhausted," Ivan
Szapakowski, a commodity strategist at Citigroup, added. "The only
remaining storage globally will then be floating storage, tankers."

Natural gas plunged $0.20, or 6.88 percent, to
$2.70/mmbtu after the EIA reported that operators withdrew 219 billion
cubic feet from storage last week, less than the 233 to 238 bcf that
most analysts were expecting.

"Everyone, myself included,
over-estimated the cold," said Stephen Schork, President of Schork Group
Inc. "From the mid-Atlantic, up to New England and through the Midwest
it was cold, but it was relatively warm out West and you had the
President's Day weekend. Those two factors were hard to gauge."

"The
market appears to be discounting the overall impact of the
end-of-season reduction in inventories, electing instead to look beyond
the winter to the possible record-breaking injection season ahead,"
added Teri Viswanath, director of commodities strategy at BNP Paribas....MORE

After hovering around breakeven for the first hour of trading, Tesla Motors Inc (NASDAQ:TSLA) shot higher on rumors out of China that Apple Inc. (NASDAQ:AAPL) -- which is reacting to its own buzz
-- intends to invest in the electric vehicle maker. As a result, TSLA
options are flying off the shelves, especially on the bullish side, with
traders placing last-minute bets.

The equity's 30-day at-the-money implied volatility has edged 2.5%
higher to 38.2%, reflecting the growing popularity of near-term
contracts. In fact, the 10 most active TSLA options expire at tomorrow's
close, and calls are crossing the tape at twice the average intraday
pace.

Most active is the weekly 2/27 210-strike call, which bulls are once again buying to open to bet on a move north of $210 by the end of the week....MORE

Traders sent the price down on the benchmark futures market in spite
of chilling temperatures and a winter front that has blanketed much of
the country in snow.

The U.S. Energy Information Administration’s weekly report on natural
gas inventories showed a higher-than-normal withdraw of natural gas for
the week ending Feb. 20, but even that strong draw didn’t measure up to
analysts’ expectations.

Since 2007 I've been recommending Professor David J.C. MacKay, who used to hang his hat at Cambridge's Cavendish Laboratory, where as best as I can tell, they manufacture physics laureates for the Nobel folks. (29 at last count).
He has a bunch of letters after his name.

Mackay left the lab in 2013 to be the University's first Regius Professor of Engineering but remains Chief Scientific Advisor
to Great Britain's
Department of Energy and Climate Change. Here's his Cambridge website.
When people want to talk energy with me I usually ask if they have read his book. Finally, here is the new download page.
If you've read the book you understand some of the challenges.Alternatively here are a couple of the engineers who helped spearhead the GOOGs efforts writing for the brainiacs at IEEE Spectrum:

What It Would Really Take to Reverse Climate Change

Ross Koningstein and David Fork
are engineers at Google, who worked together on the bold renewable
energy initiative known as RE < C .

They dedicate this article to the memory of Tim Allen, who led the
project. Allen inspired them to question their assumptions about what it
would take to reverse climate change. “He wasn’t married to one
approach,” Koningstein says. “He was intent on solving the problem.”

Google cofounder Larry Page is fond of saying that
if you choose a harder problem to tackle, you’ll have less competition.
This business philosophy has clearly worked out well for the company and
led to some remarkably successful “moon shot” projects: a translation
engine that knows 80 languages, self-driving cars, and the wearable
computer system Google Glass, to name just a few.

Starting in 2007, Google committed significant resources to tackle
the world’s climate and energy problems. A few of these efforts proved
very successful: Google deployed some of the mostenergy-efficient data centers in the world, purchased large amounts of renewable energy, and offset what remained ofits carbon footprint.

The money to be made will be in financing and financialization, not solar manufacturing.
But you knew that.
From GigaOm:

Solar installer and financier SolarCity
announced on Thursday that it plans to raise a $750 million fund to
invest in installing solar panels on the rooftops of home owners, and
$300 million of that fund will come from tech giant Google. While Google
has put over $1 billion into clean energy projects over the years, the
commitment to the SolarCity fund is Google’s largest to date, and the
entire fund will be the largest one ever created for residential solar
projects.

The deal shows the momentum behind the booming solar panel industry in the U.S. Solar energy represented over a third of all new electricity in the U.S. in 2014, and that could grow to 40 percent in 2015, which would be a new record. The solar industry is now a major U.S. employer, employing twice as many
workers as the coal industry; SolarCity employs more workers in
California than the state’s three large utilities combined, said
SolarCity CEO Lyndon Rive at the ARPA-E Summit earlier this month....MORE

The writer, Katie Fehrenbacher, has been on this beat for quite a while and is pretty sharp but falls into the industry's PR machine when she repeats the "twice as many as the coal" industry chestnut.

The reason it takes more people is that the solar industry is so darn inefficient. In a comment at Environmental Capital's December 2008 post "Green Jobs: Are They Just a Myth?" I tried to explain the problem as it related to energy:

The key to greencollar jobs is inefficiency. The more labor intensive the energy production the more people you will employ.

Doing a reductio ad absurdum, you would construct a human powered generator.
At a spacing of one meter, a 950 mile diameter wheel would employ five million people.
At 1/10 horsepower per person you would generate 3 million kWh/day.
Of course paying even the minimum wage gets your cost up to the $90.00
kWh range (i.e $80,000/month for the average home’s usage) but you’ve
put 5mm folks to work.

This is an extreme example but the concept is pretty well fleshed out in the literature.

As she and Plummer munched their
respective fractions of peanut-butter bar, they recalled A Royal
Christmas. “We played every awful hockey rink all the way from Canada to
Florida,” Andrews said. “We had huge buses we could sleep in. It was
with the London Philharmonic and the Westminster Choir and the Somebody
Bell Ringers and the Something Ballet. And Chris and me doing our bit.
It turned out to be great fun under awful circumstances, didn’t it?”
“The bus was the most fun,” he said. “We had our own bar, so we couldn’t
wait to get there.”

We've been following the Omaha insurance salesman since passing on BKHT at $800.
Ahem....

One of the things to note about the partnership and early Berkshire days is that Warren was a bit wilder than subsequent hagiography would have one believe. Some of our posts after the Financial Times links.
From FT Alphaville:

It is the Golden Anniversary edition,
with musings not just on the past year but also on what the next 50
might hold. We are promised a little reminiscing, too — which prompted
us to look back to the time when Mr Buffett assumed control of an ailing
New England textile manufacturer and set out on his most extraordinary
journey.

Fifty years ago, the Omaha oracle was running an investment fund, the
Buffett Parternship, for which Berkshire was just the latest in a
number of positions. The annual letter covering 1965 is recognisably
Buffett; you can tell from the LBJ joke at the very beginning.

The partnership had been buying shares in Berkshire for more than two
years before the 34-year-old Mr Buffett resolved to take control of the
company, getting himself elected to the board on May 10, 1965 and
installing new management. This is how he first described Berkshire to
his investors (there are points for identifying the “West Coast philosopher” mentioned below)....MORE

We first posted the partnership letters in September 2007 when it was one of our most popular offerings.
This is a repost from Sept. 2008 with the special bonus feature of a few of the early Berkshire Letters to Shareholders.
But Wait, there's more! The link to Warren's Mr. Market quote....

Wednesday, February 25, 2015

Apple probably isn't getting into the car business. At least not
in the way we know it today. It's getting into the mobility business,
where you dial up a ride on your smartphone, Uber-style, get to where
you're going and move on with your life. No monthly payments, no
insurance, no maintenance and repairs. That's what Apple could bring to
the game, and it's obviously not alone.

That's led
to a string of analysis and speculation about exactly what Apple is
doing and how a company known for PCs, phones, and tablets could
possibly survive in the traditional automotive space. It can't because
it doesn't need to.3

Ex-GM CEO Dan Akerson's comments about Apple having "no idea" what it's getting into
were actually prescient, because he doesn't have a clue. Akerson is
looking at building and selling cars from the traditional standpoint of
an industry that's been optimizing, iterating, and churning them out for
over 100 years. Unlike an iPhone, the profit margins are slim and the
cost of doing business is massive. It doesn't matter Apple has nearly
$180 billion in the bank, a market cap that's triple the size of Toyota,
and is spending money any way it can.4

The good, the bad and the foreign: Icelandic lesson for stabilising the Greek banks*

Ever since 2010, when Greece first turned to the IMF for assistance,
the crisis handling has been characterised by too little too late, which
is why Greece is still grabbing the headlines. The Greek banks are a
serious part of the problem with liquidity crunch and non-performing
loans at 33.5% 2010-2014 according to World Bank
data. Banks with such numbers can hardly perform their role of
stimulating the economy with sustainable lending. Whatever measures
Greece will use to tackle its problems the banks have to be dealt with.

In October 2008 the three largest banks in Iceland experienced
liquidity problems due to a series of mistakes, fickle foreign funding,
outright fraud, bad luck and a weak lender of last resort.
The Greek banks are in a less dire situation than their Icelandic
counterparts in 2008. However, if Athens, Brussels and Frankfurt do not
soon present a credible plan for Greece a bank run (compared to the
recent trot of €100-200m a day) unavoidably ensues at some point:
depositors, distrusting the deposit insurance system, take out their
savings and stash them at home rather than waiting for a bail-in, as in
Cyprus or bankruptcy proceedings.

Here is a lesson from Iceland. In October 2008 the Icelandic
government acted on a bank run by forcing the dysfunctional banks, by
then lacking liquidity, into receivership, splitting their operation in
two. Instead of the classic split into a good bank/bad bank the domestic
operations were consolidated in a New bank with the foreign operations
left in the estate of the Old failed bank; in effect a split into a good
domestic bank and a bad foreign one. Some weeks later, capital controls
were put in place, forcing investors to stay put and shoulder the risk.

An aside on the Icelandic capital controls: they came into being with
full support of the International Monetary Fund, IMF because the
foreign currency reserves were not enough to meet demand. This is a very
different situation from Cyprus where capital controls were put in
place for the banks to hold on to deposits, as would be the case if
capital controls were used in Greece.

The Greek banks do now rely on both domestic and foreign funding:
domestic deposits and European Central Bank, ECB, funds (through various
mechanisms) amounting to 20-25% of the balance sheet. The assets are
mostly domestic: performing and non-performing loans, cash, real estate
etc. Hence, a clean domestic/foreign split is not possible – but a mixed
split is....MORE

Exchange-traded funds can jump off the rails and trigger higher trading costs when disruptions hit their normal trading mechanism.

A good example cropped up on Wednesday, just hours after PowerShares announced that it “temporarily” suspended
new creation units for 11 ETFs. Normally, specialized dealers work to
create and destroy the number of ETF shares on the market. These dealers
(called authorized participants) work with ETF companies to hammer an
ETF’s price in line with the value of its holdings. This process keeps
share prices for, say, the SPDR S&P 500 ETF (SPY) closely aligned with the S&P 500 index.

But look what can happen when there’s no way to expand the share count: the ETF can trade at a big premium. The $481 million PowerShares DB Oil Fund (DBO) is among the ETFs affected by PowerShares creation halt.

Soon after the opening bell, DBO’s price jumped way above its NAV. As illustrated below, it also rose well above prices for United States Oil Fund (USO) and the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL).

The white line at the top is the price of DBO just before 11:00 a.m. Eastern, more than 2% above the other oil funds:

That premium quickly collapsed. Some traders appear to have gotten
wise to DBO’s artificially high price and sold shares short, traders
said. At the same time, oil prices rose. Less than an hour later, prices
for the three funds had converged.